Ottawa, Canada – July 30, 2025
The Bank of Canada today announced it would maintain its target for the overnight rate at 2.75%, opting for a third consecutive hold amidst a considerable slowdown in Canadian economic activity. The central bank cited ongoing shifts in US trade policy and the persistent uncertainty surrounding it as primary factors weighing on the national outlook.
While Canada’s headline inflation rate remains near the Bank of Canada’s 2% target, registering at 1.9% in June, the Monetary Policy Report released today indicated that underlying price pressures have picked up. This complex economic landscape, balancing slowing growth with persistent inflation, contributed to the Governing Council’s decision to keep rates steady.
Impact of US Trade Policy
The Bank of Canada explicitly highlighted that the “outlook for the Canadian economy remains clouded” due to the high uncertainty surrounding US tariffs on Canada. Although there has been some “resilience” in the face of these disruptions, particularly due to a “pull-forward” in exports to the US in the first quarter of 2025 as firms tried to get ahead of anticipated tariffs, the subsequent effects are now being felt.
The Bank’s report detailed that Canada’s GDP likely declined by approximately 1.5% in the second quarter, largely as a “payback” for the earlier export surge and due to lower US demand for Canadian goods stemming from the tariffs. Sectors directly reliant on US trade, such as manufacturing and transportation equipment, have been particularly hard hit, with significant declines in exports of steel, aluminum, and motor vehicles.
Governor Tiff Macklem acknowledged that while the risk of a severe global trade war has somewhat diminished, US trade policy remains unpredictable, creating an environment where business investment, employment, and household spending are being restrained. He warned that tariffs “mean the economy is going to work less efficiently” and will result in a “permanently lower path” for economic growth unless they are removed.
Inflation and Domestic Resilience
Despite the trade headwinds, the Bank noted some domestic resilience. Employment, while showing job losses in trade-affected sectors, has continued to grow in other parts of the economy, though the unemployment rate has edged up to 6.9% in June. Consumer and business sentiment, while still low, has also shown some improvement.
On the inflation front, while the overall rate is close to target, underlying inflation is assessed to be around 2.5%, indicating some persistent price pressures, particularly from non-energy goods prices and elevated shelter costs.
Looking Ahead
The Bank of Canada’s decision to hold rates reflects a cautious approach in a volatile environment. The central bank emphasized that its future policy decisions will be less forward-looking than usual, instead closely monitoring how trade disruptions spill into consumer prices and broader business activity.
While some analysts anticipate that the Bank could resume rate cuts later in the year if the economy weakens further and inflation tied to tariffs remains contained, the immediate focus remains on navigating the unpredictable landscape shaped by US trade relations. The outcome of ongoing US-Canada trade negotiations will be a critical determinant for Canada’s economic trajectory through the remainder of 2025 and into 2026.
